R15: Option Strategies

Question 1

What are the greeks for long call, short call, long put, short put?

Answer 1

LC: D+, G+, V+, T-
SC: D-, G-, V-, T+
LP: D-, G+, V+, T-
SP: D+, G-, V-, T+

Question 2

What are the greeks for a covered call? What are the max profit max loss and BE? Why use covered calls?

Answer 2

D+, G-, V-, T+

Max profit= X - S + Call premium
Max loss= S - C
BE= S - C

Income
Improve on the market
Target price realisation

Question 3

What are the greeks for a protective put? What are the max profit max loss and BE? Why use protective puts?

Answer 3

D+, G+, V+, T-

Max profit: unlimited
Max loss: S - X + P
BE: S + P

Protect against underlying price falls

Question 4

CC vs PP

Answer 4

Both has positive delta but less than 1 which reduces downside risk with some upside.

PP - repeated use will significantly reduce returns.

CC - hold underlying for a long time, believe underlying price won’t move much in near-term.
PP - bullish but want downside protection.

Question 5

When is gamma, vega and theta highest?

Answer 5

Gamma: ATM close to expiry
Vega: ATM far from expiry
Theta: ATM close to expiry

Question 6

How can you reduce risk when short stock?

Answer 6

Long call (=Long put), delta less negative but cost
Short put (=Short call), delta less negative and income

Question 7

What are the freeks for a calendar spread and straddle?

Answer 7

Calendar: D 0, V+, T+

Straddle: D 0, G+, V+, T-

Question 8

What are short risk reversal and long risk reversal? When do each apply?

Answer 8

Short: long OTM puts, short OTM calls. If expect skew will steepen.

Opposite for long.

Both vega neutral and dynamic delta hedging.

Question 9

What would you use if you’re bearish and expect volatility to fall?

Answer 9

Short call (D-, V-)